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Copyright 1996 CAUSE. From CAUSE/EFFECT Volume 19, Number 2, Summer 1996, pp. 10-17. Permission to copy or disseminate all or part of this material is granted provided that the copies are not made or distributed for commercial advantage, the CAUSE copyright and its date appear, and notice is given that copying is by permission of CAUSE, the association for managing and using information resources in higher education. To disseminate otherwise, or to republish, requires written permission. For further information, contact Julia Rudy at CAUSE, 4840 Pearl East Circle, Suite 302E, Boulder, CO 80301 USA; 303-939-0308; e-mail: [email protected]
New economics are driving campuses to reassess their financial strategies for managing information technology investments. Many institutions will be faced with the prospect of developing an entirely new game plan. This new plan will require collaboration among academic, financial, and technical leaders; a rejuvenation of the collective conventional wisdom on campus; a shift to life-cycle budgeting; an emphasis on technology replacement; explicit plans to recycle old technology off campus; and, most of all, a willingness to recognize and accept the significant financial challenge that evolving information technologies will bring.
The fundamental economic factors underlying information technology are unlike those of more traditional assets. Technologists are finding the new economics to be a slippery slope from which to develop new financial strategies. The rate of technical advancement is accelerating, standards and architectures are changing daily, and prices are falling. Nevertheless, the legacy-based management practices and financial strategies of both technologists and financial officers have changed little in the face of these new realities. The jargon of the technical community is rich with sound bites of financial understanding, yet void of any holistic financial plan to deal with the fundamental economics of information technology. Developing rational and viable financial strategies to accommodate technological change is an institutional imperative for effective information technology management.
Life cycles
Recognizing the economic life cycles of information technology is at the core of understanding the new economics. Each new technology generation has an economic life cycle that is independent of its functional life cycle. Computers rarely wear out. Instead, they become economically obsolete and are replaced. The record of academic institutions is littered with examples of technology at every level -- desktop PCs, departmental servers, campus networks, and shared regional supercomputers-that have become functionally obsolete long before their hardware stopped working.
What can institutions do to effectively manage their technology investments in light of these economic forces? What are the fundamental tenets of a new financial game plan for managing those investments?
While planning in this environment is difficult, it is not impossible. If the one thing known with certainty is that technology will change, then the one thing that must be planned for is change. Any financial strategy that impedes change is likely to suboptimize or even undermine the investments that rely on it. Moreover, in a competitive environment where information technology can be key, staying ahead of the technology curve may actually be a critical success factor for institutions.
This doesn't mean there isn't a need for technology infrastructure. However, it does imply that hardware and software may not be the most important aspect of technology infrastructure. The changing nature of technology suggests that standards, architectures, and resource allocation systems that allow us to manage changing hardware effectively may be the real infrastructure needed. More exactly, it's not actually the standards or architectures that are needed. The real infrastructure imperative is to create the underlying processes that can produce the standards, architectures, and governance mechanisms to manage the changing technology.
In other words, the infrastructure most needed to support the information era is financial, social, and political, not technical. Financial infrastructure is the institutional commitment to understand the economics, develop appropriate financial strategies, and fund technology adequately. Social infrastructure is the critical mass of faculty, staff, and students who are willing to accept and work for change. Political infrastructure is the collective resolution of senior administrators, trustees, and legislators to support information technology as a strategic imperative for the campus.
If the biggest financial lie has to do with cost, the second has to do with the benefits of information technology. This is typically born from honest yet excessive enthusiasm. The case for technology is very compelling, but it is not a solution to all things, nor are all the promises deliverable yet. Overselling the benefits may help obtain support or funding in the short term, but will almost certainly jeopardize long-term credibility. Financial planners and CIOs need to be careful to ensure that their business cases don't inadvertently sow the seeds of skepticism as a result of overreaching.
Myth 1: Falling computer prices and commodity markets will reduce the total cost of campus technology expenditures. Like many of the myths, this is a seductive notion that is easy to buy into. The truth, however, is that falling acquisition prices do little to lower the total cost, and in truth may contribute to increases. As the acquisition price falls, more users buy more technology. The growth in demand for more powerful computers and support is growing faster than prices are falling.
Myth 2: Cheap PCs with the power of mainframes are making distributed computing cheaper than central computing. Similar to the assumption above, this myth overlooks the increase in demand for computing power. More importantly, it fails to take into account the additional support costs associated with maintaining distributed computing systems. There are numerous studies by the Gartner Group that demonstrate the growing total cost of distributed computing.3
Myth 3: The marginal cost of supporting another software package, hardware platform, or standard is small. Much of the increased cost of distributed computing systems can be attributed to the decentralized and heterogeneous nature of the environment. The result is a highly complex web of computers and networks that is very difficult and expensive to support. Adding another brand of computer, software version, network protocol, or operating system causes the complexity to grow exponentially. The result is often a more heterogeneous environment and much higher total costs.
Myth 4: Information technology investments can be effectively managed through an ad hoc funding process. One problem with ad hoc funding is that it spawns ad hoc decision-making. This is fundamentally inconsistent with the need for information technology organizations to proactively manage change to ensure maximum effectiveness. A second problem is that individuals and organizations often have no faith that ad hoc funding will be there to replace their three-year-old computers. Therefore, they have strong incentives to purchase today the most expensive computer they can, a practice that leads to excessive spending as well as a loss of future benefits as a result of more timely upgrades.
Myth 5: Personal computers and distributed computing environments mean an end to central computing authority and enterprise-wide standards. PCs are highly valued because of the freedom of choice they give to individuals. Faculty, staff, and students can customize their computing systems to meet their personal preferences. The advent of PCs has clearly reduced the campus hegemony of central computing organizations. But this may be about to change. As stated previously, these environments are becoming increasingly complex and expensive to support, and campuses are under pressure to ensure that it all works together. Similarly, the need on many campuses for enterprise-wide solutions to networking, e-mail, and data storage problems is highlighting the necessity for a stronger central computing authority.
Myth 6: Emerging technologies and technology-based services will be cash cows for higher education institutions. There is a growing consensus that information technologies, and distance learning technologies in particular, will markedly contribute to the financial well-being of many institutions. This belief appears to have its roots in the notion that these new systems will truly disintermediate students from campus and faculty, thus allowing cost savings from reductions in faculty as well as bricks and mortar. There are problems with this assumption. First, the scenario implies that education would be transformed into a highly profitable enterprise. If true, it would spawn a whole new set of profit-motivated competitors that would either drive down prices (and thus profits) or force campuses as we know them today to change radically. In either case, there would clearly be very high costs. Second, even in the best-case scenario, the cost of aquiring and developing the new system will likely make the financial crisis worse before it makes it better.
Myth 7: Higher education is leading the information technology industry in setting standards and functional requirements. Higher education has an important leadership role to play to ensure that emerging technologies deliver on the educational promise. However, the higher education community needs to be mindful that the educational marketplace is only 6 percent of the total technology marketplace, and that the large size of industry and household markets will continue to drive many of the important development decisions and directions.4
Do the right financial analysis
A frequent charge leveled at higher education is that it is falling behind the curve of what society is demanding of it. Investments in information technology are an opportunity to help close this gap. However, the decision to invest in educational technologies is often restrained by using either conventional methods of capital investment analysis, or no analysis at all, where the conventional wisdom tends toward ignoring hard-to-measure benefits. When a formal analysis is done, the value of technology is almost always underestimated because of a hesitancy to include anything but the most directly obvious benefits.
A challenge for central computing administrators in this environment will be to understand each of these perspectives and function as mediator in the funding equation to ensure that the sum of the parts continues to be greater than the individual pieces-a difficult prospect in a decentralized environment. The challenge will be to balance the demands of individual departments against the needs of the institution as a whole. Solving sub-problems does not solve the larger problem. It would not be unusual for a research university with 25,000 students to own 18,000 computers (not counting student-owned machines) with an asset value of $90 million dollars. Maximizing the return on these investments, department by department, may be much different from optimizing their return for the institution as a whole.
Many skeptics of budgeting and planning for information technology view long-term planning for technology as an oxymoron. Although they may be right in some ways, life-cycle budgeting offers the best chance to prove them wrong. Learning this technique and using it is a critical first step toward overcoming the legacy-based planning biases of the past. Life-cycle planning can be used to: (1) avoid unplanned "expectation inflation," where both planners and users continually underestimate the demand for future information systems; (2) combat unrealistic "life-cycle optimism," where planners are coerced by their own false optimism or pressure from superiors to adopt an overly optimistic estimation of the true life-cycle of technology investments; and (3) clarify the forces driving widespread, but largely uncoordinated, "investment creep," where institutions, schools, and departments continue to marginally expand their technology budgets in an ad hoc fashion despite their best efforts to hold them flat and deny the need.
Abandon the myths of legacy-based thinking
Do the right financial analysis
Develop new financial strategies
There is, however, hope. The key is to separate the myriad of short-term technical considerations from the longer-term funding decisions. Consider faculty desktop computers. Life-cycle budgeting offers the opportunity to convert this chain of apparent one-time funding decisions into an annual expense. The basic life-cycle equation (number of units x price/unit divided by life-cycle years = annual cost) converts the hardware expense of faculty desktops into a reasonably stable long-term perpetuity.8 The financial strategy is to identify the perpetuity and manage it over time. There will be many technical decisions that will vary over the years (what to buy, what standards, what architectures, what operating systems, and so forth), but the financial equation will be more permanent.
Even though the financial perpetuity is more stable than the technology, it will still vary and will need to be managed. The assumptions about quantity, price, and life cycle require continual review and updates. The financial management question is to determine whether the perpetuity is expected to decline, remain flat, or increase over time. The emphasis needs to be on the continuing cost over time, not the arbitrary cost of any particular year.
When this example of faculty computers is combined with other enterprise-wide technology service areas (e.g., networking, data storage, e-mail), a collection of perpetuities can be developed. The financial strategy thus expands to the notion of managing these expenses as a portfolio of perpetuities, where services will come and go, some will grow, and others will decline. The strategic imperative for the institution is to maximize the return on the portfolio.
The challenge is thus to develop financial strategies that recycle old technology off campus. The best strategy to accomplish this may be leasing. Leasing has several advantages: (1) it sets a clear expectation that technology will be replaced on a regular life-cycle basis; (2) it shifts the burden of recycling to the vendor, who becomes responsible for disposition of the computers at the end of the lease; and (3) it offers the opportunity, depending on how the lease is structured, for the institution to recapture the salvage value of old technology before it goes to zero.
A leasing strategy that clearly commits an institution to a policy of life-cycling technology has tremendous potential. It represents an institutional commitment to managing change and is an example of the new type of infrastructure needed to manage technology evolution. It highlights the need to not just set campus standards, but to manage them over time. It also creates new urgency and opportunities to partner with vendors. In this scenario, lead vendors would be asked to play a greater support role, manage the transition from one generation of computer to the next, and participate in developing longer-term campus technology architectures.
While chief information officers, financial officers, and academic leaders will have to come together to develop and implement these strategies, it is the role of CIOs that is likely to change the most. When viewing information technology systems in aggregate, the CIO's ability to bring information technology to bear on the organizational imperatives of his or her institution might be the single most important factor in determining how technology is valued.
It is not surprising that chief information officers have a difficult job when it comes to delivering a set of services whose value is difficult to quantify and hard to measure directly. To make the information technology function a valuable asset to their respective institutions, CIOs should view their job as adding value to critical areas.9 They need to know the critical success factors inherent in their institution's plans and be able to link information technology to these plans to create value chains where they are most needed.
As strategists, CIOs need to provide more than just the technology infrastructure. They need to be actively involved in developing the business plans and financial strategies that close the gap between today's realities and tomorrow's promises. It may prove to be more important to have a chief information technology strategist than it is to have a chief technologist.
2 Dan G. Hutcheson and Jerry D. Hutcheson, "Technology and Economics in the Semiconductor Industry," Scientific American, January 1996, 54-61.
3 Gartner Group, "Total Cost of Ownership," Management Strategies: PC Cost/Benefit and Payback Analysis, 1993, 36.
4 "PC Unit Shipments by Key I.S. Market Locations," IDC's 30th Annual Computer Industry Briefing Session, 1994. (Track 5-Services/Consumer. Report #5).
5 John K. Shank and Vijay Govindarajan, Strategic Cost Management: The New Tool for Competitive Advantage (New York: New York Free Press, 1993).
6 John K. Shank and Vijay Govindarajan, "Strategic Cost Analysis of TechnologicaI Investment," Sloan Management Review 34 (1992): 39-51.
7 Shoshana Zuboff, "The Emperor's New Workplace: Information Technology Evolves More Quickly than Human Behavior," Scientific American, September 1995, 202-203.
8 John L. Oberlin, "Departmental Budgeting for Information Technology: A Life-Cycle Approach," CAUSE/EFFECT, Summer 1994, pp. 22-31.
9 Michael J. Earl and David F. Feeney, "Is Your CIO Adding Value?" Sloan Management Review 35 (1994): 11-20.
John L. Oberlin ( [email protected]) is Interim Director for the Office of Information Technology (OIT) at the University of North Carolina at Chapel Hill. As such, he is responsible for the academic computing center, user services, and communications organizations, as well as for implementing a broad-based financial planning effort for information technology. Formerly, he was Director for Finance and Planning for OIT, as well as Project Director for the Institute of Academic Technology in Research Triangle Park, North Carolina.